Should You Consider Buying-Down Your Mortgage Rate?

In the home financing process, there are different ways to buy-down your mortgage rate. One is for the short term, when your payments decrease for a certain number of months or years, and then return to the previous amount.

The other option is a permanent buy-down, which will affect the rate for the entire term of the loan.

In a temporary buy-down, you are paying to reduce the payment, but in a permanent buy-down, you are paying to reduce the rate, which will also lower your payments.

When considering buying-down, you’ll want to ask these two important questions: How much will it cost, and how long do I plan to own the home?

Your recapture period should be your guide. For example, if a buy-down will cost $2,000, but will decrease your payments by $32 per month, that equates to 62.5 months, or more than five years (2000 divided by 32 = 62.5).

If you plan to move within three years, you may want to pass. But if your idea is to live there for 10 years, it might be a good strategy.

Temporary buy-downs are typically available from one to three years. If you are thinking that this initial lower payment enables you to buy more house, note that you will be qualifying based on the payment after the end of the buy-down period. This is called the fully qualified rate, and it helps avoid payment shock when the payments increase again.